Important functions of Money

The functions of money can be classified as follows.

1) Money as a medium of exchange

The basic function of money in an economy is to act as a medium of exchange. Money has general acceptability and purchasing power so it can act as a medium of exchange. When money is transacted, purchasing power is transacted from one person to another. In earlier periods we had been following barter system. Barter system means exchanging goods for goods. But most of the time, for such exchange to take place, there must occur a double coincidence of wants. That is each party to the exchange must have precisely what the other party requires, and in an appropriate quantity and at the time required. The use of money as a common medium of exchange has facilitated exchange greatly.

2) Money as a Unit of Account.

Money customarily serves as a common unit of account or measure of value in terms of which the values of all goods and services are expressed. This makes possible meaninigful accounting systems by adding up the values of a wide variety of goods and services whose physical quantities are measured in different units

3) Money as a Standard of Differed Payment

Money also serves as a standard or unit in terms of which deferred or future payments are stated. This applies to payments of interest, rents, salaries; pensions etc.Large fluctuations in the value of money (inflation or deflation) make money not only a poor measure of value, but also a poor standard of deferred payment. This is because the value of money is not something intrinsic to it, but a social phenomenon. This makes monetary management for the stable value of money socially very important.

4) Money as a Store of Value

Money also serves as a store of value i.e., members of the public can hold their wealth in the form of money. This function is derived from the use of money as a medium of exchange in a two-fold manner. First, the use of money as a medium of exchange decomposes a single barter transaction into two separate transactions of purchase and sale.

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